October 27: Daily Contrarian Reads

Central banks continue to focus on consumption inflation, not asset inflation, in their decisions. Their attitude has supported one bubble after another. These bubbles have led to rising inequality and made mass consumer inflation less likely......Recently, some central bankers have been puzzled by the breakdown of the Philipps Curve: that falling unemployment rates would lead to wage inflation first and consumer price inflation next. This shows how some of the most powerful people in the world operate on flimsy assumptions.

Congress is trying to ram through a bill that would reshape the U.S. economy in just a few short weeks, but its leaders have kept the plan shrouded in secrecy and released not a word of legislative text....David Stockman, a former budget director for President Ronald Reagan, said the Trump plan “can’t possibly get done by year-end,” describing that as an unrealistic and “amateur” view. He said Reagan’s 1986 tax overhaul, which Republicans cite as a guiding light for their current efforts, took two years because cobbling together the support for raising revenue to pay for tax cuts is “very hard politically.”

But it can’t end well. To illustrate his point about the risk in owning bonds these days, Gundlach shared a chart that showed how investors in European “junk” bonds are willing to accept the same no-default return as they are for U.S. Treasury bonds, pointing out that this phenomenon has been caused by "manipulated behavior" by central banks.

The revelation that Hillary Clinton’s campaign and the Democratic National Committee helped pay for the notorious “Steele Dossier” of hearsay claims about Donald Trump’s relations with Russia is not surprising but is noteworthy given how long the mystery about the funding was allowed to linger.

Netflix, whose shares went from $9.94 to $192.47 in five years, is on a peculiar and accelerating treadmill: It needs to borrow ever larger amounts just to cover its ever-larger negative cash flows year after year. These negative cash flows are mostly caused by ever more spending on its proprietary streaming entertainment programming that is needed to attract ever more subscribers, who are needed to support its gigantic market capitalization of $84 billion. And that gigantic stock market capitalization is needed as a guarantee of sorts for the bondholders…. If this seems a bit circular, it’s because it is.

Basically, all it takes to be a brilliant Fed chair is to inherit a Fed devoted to massive monetary stimulus from Ben Bernanke, and then basically do nothing to upset the apple cart, all the while promising to "normalize" matters someday. In all cases, the narrative continues that the US economy is "humming" and everything's great. How great? Well, not great enough to actually raise the target rate or sell off a meaningful amount of the Fed's balance sheet. Doing that might destroy the economy. But things are great! Trust us.

...[A]s the Intl-FC Stone chart below shows, the number of fully-invested institutional "bears" out there has never been higher after a decade of financial repression turned cash into trash. In fact, money market funds assets account for just 17% of the assets of long-term funds, a historical low. Similarly, the cash balance of equity mutual funds is at an all-time low 3.3%.

As their U.S. allies watched, the Kurdish peshmerga fighters were run out of Kirkuk and all the territory they had captured fighting ISIS alongside the Americans. The Iraqi army that ran them out was trained and armed by the United States......After 4,500 U.S. dead, scores of thousands wounded and a trillion dollars sunk, our 15-year war in Iraq could end with a Shiite-dominated Baghdad aligned with Tehran.

The plan in Japan, as elsewhere, was the same old formula: create fake money… lend it at super-low rates… drive up inflation… and incite the public to spend and invest. The whole idea is preposterous. What dopey jackass first came up with the idea that you could improve a market economy by feeding it fake money. Can you make a horse run faster by giving it fake oats? Can you get more mileage out of your car by diluting the gas with water? Can you clean out your garage by pretending to work on a phony Saturday?

A total of five people were killed at the beginning and the end of the Bolshevik revolution. In between, Lenin and Stalin (mainly Stalin) executed or starved at least 15 million people, according to the 2007 edition of Robert Conquest’s 1968 book, The Great Terror. Conquest had initially estimated 20 million. We will never know for sure, he said in 2007. Out of the Bolshevik Revolution came the Chinese Communist revolution under Mao. There were more: North Vietnam, North Korea, Cambodia’s Khmer Rouge, Cuba, Albania, and the Soviet satellite nations in central and eastern Europe. The grand total of those who died under Communist tyranny was between 85 million and 100 million, as reported by The Black Book of Communism (1997). This may have been as high as 150 million. Without Lenin, there would not have been Hitler. Hitler positioned his National Socialist German Worker’s Party as the only reliable bulwark against Bolshevism. Add another 60 million for World War II.

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.